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Vol. 15, No. 7 Week of February 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Big Risk, Bigger Rewards: The strategy of stepping out at Alpine

At the Colville River unit, sequential development gave ConocoPhillips a way to make sure ‘big’ was also ‘big enough’

Eric Lidji

For Petroleum News

For the time being, “big” in Alaska is a lot bigger than what most people think of as big.

After more than 30 years of oil sales from one of the largest resource basins in North America, the infrastructure network on the North Slope of Alaska is still limited. Without creative solutions, oil discoveries that would be considered gold mines anywhere else in the country can be marginal in northern Alaska. Giants can sit for decades untouched.

Over the past 15 years, ConocoPhillips Alaska and partner Anadarko Petroleum have discovered, developed and continued to expand the Colville River unit, with primary production from the Alpine field. Alpine is the westernmost producing oil field on the North Slope and still one of the larger onshore oil discoveries in North America in more than 20 years.

Alpine is a large field — with more than 429 million barrels in recoverable reserves — surrounded by smaller fields known as satellites that are big, most holding more than 50 million barrels of oil, but not big enough to support the cost of constructing standalone production facilities in the expensive and isolated Arctic.

So over the past decade, ConocoPhillips and Anadarko strategically stepped out production of those satellites. As the Alpine field naturally declined, the companies brought new projects online to make use of capacity at the field’s production facilities.

First oil in 2000

Since first oil at Alpine in late 2000, the companies have brought three satellites into production and have concrete plans for several others. If technology gets cheaper, oil prices rise or reserve estimates increase, then the companies could develop many more.

Alpine is a success by many measures.

The fields and satellites produced almost 346 million barrels of oil through the end of October according to the most recent numbers available from the Alaska Oil and Gas Conservation Commission.

For ConocoPhillips, this helped offset production declines at older fields like Kuparuk. For Anadarko, it provided a production base to help fund other operations in the state.

For the state, it brought revenue and bolstered throughput in the trans-Alaska oil pipeline. Alpine production is responsible for the only increase in throughput since peak production in the late 1980s.

The stepping-out approach also promises to open up the National Petroleum Reserve-Alaska, a federal reserve set aside for oil development nearly 90 years ago.

Alpine, though, is not a license to print money.

The partners spent $1 billion just to bring the field online in 2000. That doesn’t include a decade of regular maintenance and operations, continued development drilling in an expensive and environmentally sensitive area and a decade of active exploration drilling.

And because of the long lead times in the Arctic, ConocoPhillips and Anadarko have faced two periods of lower oil prices (made up for by a run of increasing prices).

The environmental challenges in the Colville River Delta region around the Alpine field demanded increased protections and considerations that factored into construction.

The location also creates added challenges in terms of land ownership. The unit touches state, federal and Native land. That means more permitting authorities, which can cause delays, force creative partnerships and set up unique tax payments and incentives.

Nestled among the giants

From the start, the North Slope set high standards for the scale required to get a field developed. The Prudhoe Bay and Kuparuk oil fields, online since 1977 and 1981 respectively, are the two largest oil fields in North America. Together, they have produced more than 12 billion barrels of oil, not including their prolific satellites.

Prudhoe Bay justified the creation of major infrastructure on the North Slope, including the trans-Alaska oil pipeline running more than 800 miles to tidewater in Valdez.

Kuparuk created the model for expansion on the North Slope, with independent processing facilities and pipelines leading back to the existing infrastructure grid.

ARCO Alaska discovered Alpine in 1994 and decided the field was commercial in 1996. Along with partners Anadarko and Union Texas Petroleum Alaska Corp., the company proposed a $700 million to $800 million program to build infrastructure and drill 100 to 150 wells. The partners originally estimated that the field contained 365 million barrels of recoverable oil.

Alpine proved attractive not only for the potential size of its reservoir, but also for the quality of its oil. The field produced from Jurassic-aged sandstone not producing anywhere else on the North Slope, suggesting similar fields yet to be discovered. At 40 degrees API, Alpine is lighter than at Prudhoe Bay (26 degrees) or Kuparuk (28 degrees).

Early successes and surprises

As the companies began developing Alpine, the field became more attractive.

First, in 1997 the reserve estimates grew to 429 million barrels from 365 million barrels.

Second, the companies announced the discovery of a field six miles to the north of Alpine called Fiord, which, at an estimated 50 million barrels, would be considered huge by Lower 48 standards, but couldn’t support standalone development in Alaska.

Third, the industry changes of the late 1990s hit Alaska. After several years of mergers, acquisitions and government deals, Phillips Alaska (ConocoPhillips since 2002) assumed 78 percent ownership of Alpine, with Anadarko holding the remaining 22 percent. Those ownership stakes have remained since first oil in November 2000.

Alpine sits 80 miles west of Prudhoe Bay, in the Colville River Delta. To develop a major field in the ecologically sensitive area, the companies developed the field with a gravel airstrip and directional drilling from two gravel pads, but without a permanent connection to the North Slope road system, an approach Anadarko described in filings in 1998 as being “like an offshore platform,” an approach the companies continued as far west as they could in subsequent years.

During construction, supplies and modules were moved to the site in the winter by ice road.

In filings Anadarko said the construction approach at Alpine shaved 30 percent off development costs, compared to other North Slope projects. The companies also performed considerable work in Alaska, building some of the production modules in Nikiski, on the Kenai Peninsula, work that became a sight to see during the construction period.

In addition to those modules, developing the field required a 34-mile pipeline from Alpine to the Kuparuk River unit, where oil would then flow back to Prudhoe. To avoid a surface crossing of the Colville River, the pipeline is buried beneath the river.

From the start, Alpine required community involvement in a way Prudhoe Bay and Kuparuk did not. The Colville River unit, which includes Alpine and its satellites, was the first significant oil production on Native land allotments in Alaska, and as a result required negotiations with Native corporations in addition to state and federal permits.

For instance, as part of a surface use agreement, ConocoPhillips (then ARCO) agreed to supply 500,000 cubic feet of gas per day to the village corporation of Nuiqsut, a community dependent on diesel fuel priced at a premium because of transportation costs.

Ramping up Alpine production

In filings in 1999, Anadarko named the most attractive features of Alpine: “repeatability” and “running room.” The phrases referred to the ability to pile one large oil discovery onto another in a region, using existing facilities, equipment and know-how to reduce costs.

As the companies ramped up Colville River unit production, they also looked for potential satellites to repeat the original work at Alpine on nearby satellite fields.

To avoid duplicating facilities, a cost that would have made additional fields uneconomic, this required not only finding those fields and working to make them commercial, but also timing the startup of those fields to match the changing profile of Alpine.

In its first five years, Alpine production gradually increased.

Brought online in November 2000, Alaska Department of Revenue figures show the field averaged 45,000 barrels per day in fiscal year 2001 (July 1, 2000, through June 30, 2001) and 96,000 bpd in fiscal year 2002.

Anadarko said in filings that the 2001 production from the field was higher than expected.

In fiscal years 2003 and 2004, production averaged 99,000 bpd, rising to 105,000 bpd in fiscal year 2005.

That initial production yielded a rare treat for the state: increased throughput in the trans-Alaska oil pipeline for the first time since peak production in the late 1980s, with total North Slope production increasing from an average of 993,000 bpd in fiscal year 2001 to 1.01 million barrels a day in fiscal year 2002.

Bringing satellites online

During those initial years, ConocoPhillips prepared for the increased production by expanding the capacity at the Alpine producing facilities in a two-phase project in 2004 and 2005. The project gave the companies the ability to produce 35,000 more barrels of crude oil each day and 100,000 barrels of produced water each day.

The increased produced water capacity allowed the companies to manage the changing profile of Alpine. As fields age, the ratio of oil, gas and water produced from reservoirs changes, requiring different handling capabilities.

In 2003, with the expansion project announced but yet to begin, ConocoPhillips and Anadarko filed an application for an Environmental Impact Statement with the Bureau of Land Management that proposed five possible Alpine satellites called Fiord, Nanuq, Lookout, Spark and Alpine West. The companies also hinted at 10 additional oil accumulations within 30 miles of Alpine that could possibly become future satellites.

In the middle of the expansion project, in 2004, ConocoPhillips and Anadarko sanctioned the development of the first two Alpine satellites: the Fiord field discovered in 1999 and the Nanuq field three miles to the south of Alpine discovered in 2001.

The new fields required additional drilling pads. In addition to CD-1 and CD-2 built with the initial development of Alpine, ConocoPhillips eventually built CD-3 for Fiord and CD-4 for Nanuq. The pads are named after the Colville Delta region where production occurs.

Satellite production in 2006

Both satellites came online in 2006 — Fiord in August and Nanuq in December.

Alpine production averaged 123,000 bpd in fiscal year 2006, according to Alaska Department of Revenue figures — the fiscal year peak of annual production for the original Alpine field. In fiscal year 2007, with satellites Fiord and Nanuq in production, overall production through the Colville River unit facilities averaged 124,000 bpd, with 103,000 bpd from Alpine, 11,000 bpd from Fiord and 10,000 bpd from Nanuq.

In 2008, the companies sanctioned a third satellite, Qannik, located in a shallower accumulation above Alpine. That location allowed the companies to develop Qannik not by building new drilling pads, but by expanding the existing pad at CD-2.

Those first three satellites shared traits that eased development. All three sat within the boundaries of the original Colville River unit, which expedited permitting.

All production was through the main facilities at Alpine. A pad and landing strip were built at Fiord — which is a roadless development — and a pad and a short gravel road to the main Alpine facilities at Nanuq.

These appear to have been the easy satellites. Additional proposed satellites in NPR-A to the west of Alpine have proven more difficult for the companies to bring into production.

Further westward into NPR-A

The difficulty and delays the companies face as they press westward is ironic, because Alpine opened a door to NPR-A oil development that had been closed for a decade.

Created by President Warren G. Harding in 1923 as Naval Petroleum Reserve No. 4, the 23 million-acre federally designated reserve in northwest Alaska was meant to preserve an oil-rich section of the territory for the U.S. Navy as it moved away from coal.

The size and remoteness of the region, though, and the fact that as of yet exploration drilling has not uncovered a single, mammoth oil accumulation like Prudhoe Bay, but rather many smaller fields, have kept NPR-A from being developed.

In the 1940s and the 1950s, the U.S. Geologic Survey and the U.S. Navy conducted the first major exploration campaign in the reserve, drilling dozens of wells. While that drilling yielded discoveries, none proved large enough to justify standalone development.

Following the Arab oil embargo in 1973, those parties struck out again through the region, by then known as NPR-A, hopeful for a large accumulation to protect the United States against future embargos or other factors that might drive up oil prices.

The second wave of expeditions, though, fared no better than the first.

In the 1980s, the federal government held four lease sales in the reserve, but companies only nibbled. The lease sales yielded only two exploration wells, and no major finds.

With the sanctioning and development of Alpine, though, federal officials once again looked to open up NPR-A, hopeful for domestic supplies and increased revenue.

A lease sale in 1999 gave Anadarko and the precedent companies of ConocoPhillips drilling rights on a section of federal land just west of the Colville River and Alpine.

In the decade since, ConocoPhillips has been the most active explorer in NPR-A, drilling 20 exploration wells, but its best prospects date to work done in the early years of the exploration program.

NPR-A 1999 leasing

NPR-A development was temporarily complicated in April 1999 when BP announced its purchase of Atlantic Richfield, including the company’s ARCO Alaska assets.

BP and ARCO were opposing bidders at BLM’s May 1999 NPR-A lease sale.

ARCO Alaska, bidding in partnership with Anadarko Petroleum, had more than $55 million in high bids ($70.6 million for the partnership). BP — bidding by itself and in two partnerships one with Phillips Petroleum and one with Phillips and Chevron — had a hand in more than $32 million in high bids.

Phillips Petroleum, bidding by itself and in the two partnerships with BP, had more than $7.3 million in high bids.

Exploration drilling began on the NPR-A prospects in the winter of 2000.

Both companies permitted exploration wells.

ARCO spud Clover A about five miles west of Nuiqsut in March 2000 and Rendezvous A another 10 miles deeper into the reserve in early April. During the same time, Phillips spud Spark 1 and the Spark 1A sidetrack just northeast of Rendezvous A in March and April.

Ownership issues were resolved in March 2000, when Phillips Petroleum announced that it was

Drilling near and far

The Alaska operation, Phillips Alaska (now ConocoPhillips Alaska), focused extraordinary attention on NPR-A, staking dozens of wells, accumulating numerous potential drilling prospects and even announcing the first discoveries in the region. Of the six wells and a sidetrack the company drilled in 2000 and 2001, all but one found hydrocarbons.

“These discoveries mark an important milestone in the Alaska oil industry,” Kevin Meyers, then president of Phillips Alaska, told the Alaska Oil and Gas Association at its annual luncheon in May 2001. “Though the results are preliminary, we’re confident the discoveries will prove to be of commercial quantities. We believe that the five successful wells have encountered three separate hydrocarbon accumulations.”

The discoveries propelled the continued flood of activity. Phillips and Anadarko drilled four NPR-A wells in the winter of 2002, and staked another eight that summer.

ConocoPhillips drilled only one NPR-A well in the winter of 2003, the Puviaq 1. The well was truly a frontier wildcat, located near the Ikpikpuk River nearly 80 miles from Nuiqsut.

For the next four seasons, ConocoPhillips continued to craft exploration programs with a mix of frontier wells and delineation wells near existing infrastructure and discoveries.

This near and far approach continued. In March 2004, ConocoPhillips drilled Carbon 1, Scout 1 and Spark 4, all within 10 miles of the discoveries made in 2000 and 2001. In the winter of 2005, the company drilled Kokoda 1 and Kokoda 5 about 50 miles west of Nuiqsut.

The following winter, ConocoPhillips didn’t drill in NPR-A at all. But in early 2007, the company drilled two wells in a partnership with Pioneer Natural Resources: Noatak 1 just north of the Kokoda wells, and Intrepid 2 south of Barrow on the far western edge of the North Slope, more than 200 miles from the closest infrastructure at the Alpine field.

Noatak and Intrepid both cost around $60 million to drill. That combined with the considerable distance to the Alpine infrastructure meant either well needed to find large reserves to justify the significant cost of developing the prospects and tying them back to existing facilities. ConocoPhillips deemed both wells “noncommercial” in May 2007.

Noatak and Intrepid offer a glimpse at the risks at play in Alaska, where more than $100 million in exploration costs can mean an oil discovery that never leads to production. In the winters that followed those wells, ConocoPhillips drilled much closer to Alpine.

ConocoPhillips is not drilling exploration wells on the North Slope this year.

Some industry groups have claimed that the most recent state tax regime is becoming restrictive. The state points to an exploration tax credit and industry documentation of increased spending on the North Slope.

Asked why it didn’t sanction exploration drilling this winter, ConocoPhillips told Petroleum News, “We have drilled 20 wells in NPR-A since 2000; this year we will not drill any exploration wells.”

Westward expansion roadblock

During those years of high-risk wildcats and exploration wells closer to infrastructure, ConocoPhillips and Anadarko began permitting a fourth Alpine satellite: Alpine West.

In 2005 filings, ConocoPhillips said a CD-6 pad for the Lookout prospect was “marginally economic,” but that the Alpine West prospect would support construction of a CD-5 drill pad and, more substantially, a bridge across the Nigliq Channel of the Colville River.

The location of that bridge — ultimately decided through negotiations with Kuukpik, the local Native corporation — led to years of delays. ConocoPhillips hoped to begin CD-5 construction in early 2007, but by early 2010 the company is still awaiting permits.

In recent years, ConocoPhillips replaced its original application with a beefed-up development plan: more wells and larger well pads, larger bridges and more roads.

In the summer of 2009, the company proposed expanding the Colville River unit by 16,400 acres to include the proposed location of the CD-5 pad on federal lands.

The company also proposed “sequential development” in NPR-A to make smaller discoveries economic — just like the “repeatability” Anadarko touted a decade earlier with Alpine construction under way. These smaller discoveries include CD-6 (or Lookout), CD-7 (or Spark) and a previously unproposed satellite called Fiord West.

In the spring of 2009, ConocoPhillips said it expected to develop Alpine West by late 2012, and develop Lookout and Fiord West sometime after 2014. The state is also betting on those satellites, including their production in revenue forecasts for the coming decade.

As the “gateway” to NPR-A, though, CD-5 must first get resolved.

Unitizing the northeast NPR-A

Unitization was a step in the development of Alpine and its satellites and ConocoPhillips has recently moved to unitize land around its discoveries in NPR-A.

In January 2009, the Bureau of Land Management approved the formation of the Greater Mooses Tooth unit, covering the discoveries ConocoPhillips made in 2001. In September 2009, the BLM expanded Mooses Tooth and approved a nearby Bear Tooth unit.

In proposing Mooses Tooth, ConocoPhillips said it planned to process NPR-A production in Alpine facilities. The company said it doesn’t have any plans to expand Alpine facilities and declined to say how long those facilities will remain adequate for the region.

The strategy, though, is clear: to continue slowly advancing westward, managing production profiles of various fields to allow maximizing the use of existing facilities.

Stepping out in other regions

The overall success of this strategy carries implications for other areas in the state.

Should the coastal plain of the Arctic National Wildlife Refuge, or the 1002 area, ever be opened to development, this sort of stepping out might be necessary, especially if the billions of barrels estimated in the region are spread over many small accumulations.

In a more likely example, Anadarko appears to be using a similar approach as it explores for natural gas in the foothills of the Brooks Range.

The company has said it doesn’t believe the extensive natural gas resources in that region are lumped together, but rather spread over many smaller accumulations over an area of hundreds of miles, meaning Anadarko will need to strategically bring original and subsequent fields into production.

As for Alpine, its satellites and the northeast NPR-A, even when the oil runs out, the existing infrastructure grid may one day become the basis for a natural gas operation, should a major pipeline from the North Slope to markets in the south ever get built.

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